Student Loans Can Make Mortgage Approval Less Likely

Your education is behind you. You have a good job and you’ve saved some money. Now it’s time to look for your first house or condominium. There’s only one potential problem: You are still paying off your student loans. How heavy will that weigh against you in the mortgage application process? That depends on many factors.

How Student Loans Can Adversely Affect Your Application
One of the first things the lender will consider is the percentage of all your debts, including student loans, to your total income. If it is more than forty percent, your application will, in all probability, be denied. The lender will also examine your credit history. Have you missed a student loan payment? Have any of your payments been late? Both will have a negative impact.

The spate of recent foreclosures, along with the necessity of financial bailouts, have made it more difficult to secure a loan, and student loans are taken into account. How you handle your loan is more important than the loan itself.

The bottom line is that a student loan, if managed responsibly, is unlikely to prevent obtaining a mortgage. That said, a large outstanding loan can and will reduce the amount of the mortgage granted. This can be circumvented by paying down the loan before you apply, or by accumulating a larger down payment.

Now the Good News:

Because student loans have low interest rates, they are not always viewed unfavorably and won’t negatively affect your credit score. Large outstanding credit card balances have a greater negative impact. Unlike credit card spending, a student loan is seen as an investment in your future earning potential. Some credit card activity is good, as it shows good money management on more than just the one loan. A history of timely loan and credit card payments is a significant step toward building a solid credit history. Never use all of your available credit.

Stack the Deck in Your Favor

Before you apply for a mortgage there are actions you can take to make a favorable impression on the lender.

· Obtain copies of your credit report from the three major reporting companies: Equifax, Experian and Trans Union. Make sure the information is accurate and clear up any errors.

· Pay off high-interest credit cards.

· Get pre-approved to avoid the disappointment of falling in love with a property beyond your budget.

· Save as much money as possible and either add it to your down payment, or pay down your student loan. Increasing your down payment is the best option unless the loan carries an unusually high interest rate. If in doubt, consult an accountant or banker as to which move is best for you.

When you have accomplished all these steps, find that perfect house or condo. As a potential buyer with your finances in order, you are ready to become a homeowner. Congratulations, and keep up the good work.

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